China Eliminates Cap to Boost Bank Lending

According to reports, China is about to scrap one of its most powerful tools of controlling bank. The step is intended enhance safety across bank, while subtly propelling the lending capacities.

The State Council of China said on Wednesday, that the preliminary draft underling the proposed banking law that will eliminate as much as 75% cap on the loan-to-deposit ratios of banks. These caps for years have limited the lending capacities of banks in the country.

The change in regulations is a part of an extensive effort which focuses on liberalizing the interest rates. The decision has been taken to help the banking sector in China to pace up with the banking regulations and monetary policies which are at par with the contemporary global practices.

The loan-deposit ratio that was adhered to was an unsophisticated measure the controlled behavior among banks and the consequences of this method was not always desirable.

Ceilings on lending only encouraged banks to camouflage loans offered as investment or disguise their appearance on the balance sheets, thereby triggering unbridled nontransparent practices, which fuelled shadow banking.

The ceilings also went against smaller banks with loser ties with the government. Most of these banks were driven commercially and faced a hard time in attracting deposits due to their limited networks. The perception that unlike larger state-owned banks, associating with these banks could mean compromising security also adversely impacted the banking operations in the country.

Owing the prevailing regulations mid-scale lenders such as Minsheng Banking Corp. and Citic Bank often hit against the loan-to-deposit ceiling. Meanwhile, the large scale banks remained comfortably below the ceiling.

However, authorities have said, the Central Bank will still have the power to set outright quotas for each bank individually. However, this does not come in the way of China taking initiatives to move towards the modern market system, which is more financial-driven.